One of the analytical errors I seem to constantly come across is what I call the non-result result.

It goes something like this: If you do X, and there is no measurable change, X is therefore ineffective.

The problem with this analysis is the lack of a control group, If you are testing a new medication to reduce tumors, you want to see what happened to the group that did not get the tested therapy. Perhaps their tumors grew and metastasized. Hence, no increase in tumor mass or spreading is considered a very positive outcome.

This seems to get loss in the debate over QE. The debate — either ignorantly or disingenuously — makes claims such as “Look how few jobs have been created, and look how high unemployment is.”

Understanding this logic, and lacking a control group, we must employ a counter-factual. The question one should be asking is “How many less jobs would have been created?; How much higher would unemployment be?”

As someone who was strongly against the bailouts, this puts me in the odd position of defending the Fed against silly criticisms. But if we are not intellectually honest about our policies, how can we ever understand, critique and improve them?

Hence, a weak or strong NFP should raise the question “What would it have been without QE? Based on that, can we determine when might this policy be unwound?

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

The phenomena can also be approached from the opposite direction: If this is what $x Trillion (fiat), buys us (in jobs), then $x Trillion (fiat), just isn’t enough.

I think the monetary distribution cycle is still corrupted or broken (very low velocity of non-credit money and the attendant declining purchasing power of the consumer class being glaring symptoms).

It is very easy to see this phenomenon as a feature, not a bug, in our system. The rigging of our economy was not a byproduct of some kind of mystical “invisible hand.” It was intentional, brought about by deregulation, and the results are exactly what were intended.

The GOP recognized this common problem with economic models and so they arranged for half of the states to not have access to Obamacare (or at least make it very difficult) to act as a control groups. They have also arranged for the governors to make appropriate soothing sounds to provide the placebo effect. We should be able to evaluate the effect of readily available health insurance complete with statistically relevant control groups now.

The previous experiment in this was a gross failure as the Massachusetts economy didn’t crash and burn as predicted and only 97% of the population has health insurance. This is why Romney had to disown his own program in order to run for president.

We do have the counterfactuals for other national economies, namely for Spain in 2012 and Greece in 2010, which had similar input shocks (government spending cuts, massive tax hikes), but no QE program to blunt the negative impact of these shocks to their economies. The same math behind our counterfactual for QE applies, and surprisingly, the same GDP multipliers, as we were able to almost perfectly match their actual GDP outcomes.

We haven’t worked it out for jobs, but we have worked out the counterfactual for QE with respect to GDP, which we’ve since used to project what 2013-Q3′s GDP will be (we had a lot of traffic from the BEA for the latter one once they returned to work.)

At this point, the main question about QE is whether or not it has reached or exceeded its efficiency limits.Does a dollar of QE return anything at all like a dollar in benefits now?

However, that begs the question of what would replace it. The Bernank and the Fed Board must feel awfully lonely standing at the end of the plank all on their own. It is hard to fault them significantly when it is clear that they are operating in a fiscal policy-free environment as Congress and the Administration engage in playing silly games that don’t even appear to fall in a reasonable game theory zone.

The Fed has taken its crisis-abatement role very seriously over the past five years despite its abysmal acquiescence to financial deregulation and lax money policy in the previous decade. It is time for other government components to do the same and relieve them of their burden.

Simple question Barry. How do you equate QE policy to Payroll improvement? Judging from the statement above, you obviously do. So tell, for every Billion dollars of QE = how many jobs? Please share your magical formula with us.

The financial system did not collapse. That was, after all, the primary reason… job preservation and growth is more a secondary effect. If you wanted a program primarily intended to create jobs it would have to come from fiscal initiatives by a Congress that gave a damn.
Good luck with that.

I would expect the studies you referenced in a post from yesterday would have taken into account this counter-factual when assessing the effectiveness of QE. Any econometrician worth his or her salt would build that into the model.

It is positively ridiculous that the Fed can’t reduce the flow even one penny, to say nothing of the massive accumulated stock. The S&P has gone straight up 100 points on essentially nothing, this after one of the biggest bull moves in history. Is anyone at the Fed even concerned an iota about bubble formation? Is the system so fragile that the world will end if the stock market doesn’t go up 20% or more a year?

I agree with the dissension of “silly criticisms” – You have to know what the problem is before you can solve it, criticism of the Fed without empirical backing is a counterproductive waste of time, in some cases I think it’s intentionally counterproductive.

That said, money supply and excess reserves are at very high levels, while velocity continues it’s downward decent and wages are at the same dollar adjusted rate they were in 1989.

While monetary policy is putting a lot of money in the hands of banks and a shrinking minority of stock market shareholders, that’s as far as it’s been getting, the only real benefit to the lesser income levels has been cheaper debt.

At their current rate of non-stop vertical increase, I calculate the “markets” are set to rally ~5% today on this worse than expected jobs report. Ever-increasing QE in perpetuity still does not appear to be priced in, even after all these years.

You also heard that type of argument against the stimulus package. They poured a 0.8 trilliion stimulus into a 2 trillion hole in aggregate demand – and people all over cried “we are not back to normal so it didn’t work”. But at least there we have a pretty good idea of what to compare with since the last financial collapse caused a depression.

Who has muzzled the fiscal policy response to the crisis? Who stands to gain most from monetary response to the crisis? Are they the same people? If yes what are their motives? Moreover, on whom the ultimate burden of monetary response falls? on whom the ultimate burden of fiscal policy response falls? The former: anyone who has claims on the dollar? the latter: the US taxpayers?

Separately, were growth trend prior to the collapse sustainable? If not the effectiveness of Fed’s policies post-crisis has to be re-examined. Krugman and Adair on the topic of QE briefly touched upon the notion that it is quite possible that Fed policies post crisis would not be able to achieve the unemployment goal because pre-crisis UE metrics were asset-bubble dependent. It would take another bubble to deliver the policy’s objective. Krugman stated that he would have to look further into this and hast yet published any findings.

I think we have a no equivalency here. QE amount rate of growth to jobs job rate of growth is not the right question. The right question is how much QE is getting into the credit growth area. There has been no credit growth, and falling velocity as an inverse to QE. Job growth or the lack thereof has some strong correlation here.

As long as the goal of QE is to re liquify the banks at the expense of everyone else, we continue to die.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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